U.S. stocks fall the most this year; Dow drops 179

Goldman analyst says S&P’s valuation is ‘lofty by almost any measure’

An earlier version of this article gave the incorrect spelling of Channing Smith, managing director of Capital Advisors. It has been corrected.

NEW YORK (MarketWatch) — U.S. stocks sold off sharply Monday, resulting in the worst losses for benchmark indexes in several months, on concerns about the weak December jobs report and comments from a Federal Reserve official about a further reduction in stimulus.

The Dow Jones Industrial Average
DJIA, -1.11%
suffered the worst one-day drop since Sep 20, shedding 179.11 points, or 1.1% to 16,257.94 by the close, falling for the fourth-straight session.

The S&P 500 index
SPX, -0.88%
closed down 23.17 points, or 1.3% to 1,819.20, snapping its two-day winning streak. The Nasdaq Composite
COMP, -0.94%
finished 61.36, or 1.5%, lower at 4,113.30. Both the S&P 500 and Nasdaq saw their worst one-day point and percentage drops since Nov 7.

Monday, Jan. 13: Is a GM dividend coming?

(1:12)

Victor Reklaitis takes a look at which stocks traders will be watching during market action, including General Motors, Lululemon, and Wendy's. Photo: AP.

Channing Smith, managing director at Capital Advisors, said that markets are playing catch-up with the bond market, finally realizing that the jobs numbers were fairly bad.

“Investors are also nervous ahead of earnings releases from the banks tomorrow and if the results miss expectations, there will be a lot more pressure on the markets,” he added.

On Friday, the government reported that the U.S. economy added 74,000 jobs in December, the smallest gain in three years and well below economists’ forecast of about 200,000. The unemployment rate fell to 6.7%, however, largely due a large number of people dropping out of the labor force. Investors were undecided whether this should be taken as a negative or positive for markets, as stocks fluctuated in an narrow range on Friday, closing mostly higher.

Weighing on sentiment were comments from Atlanta Federal Reserve President Dennis Lockhart. In a speech to the Rotary Club of America, Lockhart said he supports “similar tapering steps” as the one taken to reduce bond-market purchases by $10 billion by the Federal Reserve last month, so long as the economy grows at the 2.5% to 3% clip he’s forecasting this year.

He pointed out that the labor market is not as healthy as a 6.7% unemployment rate suggests. He said continued disinflation could pose risks to economic performance. Follow stock market live blog here.

J.J. Kinahan, chief strategist at TDAmeritrade, said that markets are having a delayed reaction to the jobs data.

“When payroll numbers came in, we all thought that the first digit was missing, then realized that it was just 74,000. Market reaction to that number on Friday was anomalous, as they shrugged them off. Today buyers that usually came in the afternoons were absent and people were taking profit and lightening their positions in an anticipation of earnings results,” Kinahan added.

In separate news, the federal government recorded a budget surplus of $53 billion in December, the Treasury Department reported Monday. Nearly $40 billion in payments from government-controlled mortgage giants Fannie Mae and Freddie Mac helped the surplus, the largest on record for the month of December. The surplus brings the government’s budget deficit for the first quarter of fiscal 2014 to $174 billion, 41% lower than the first three months of fiscal 2013.

The pullback in stocks comes as investors worry that the stock rally looks stretched. David Kostin, equity strategist at at Goldman Sachs, wrote that the S&P 500 valuation is looking “lofty by almost any measure.”

Comment: Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York, wrote in a note: “The most disappointing number from Friday’s Employment Report was not the miss to jobs growth expectations (74,000 versus the hoped for 200,000), but rather the continued precipitous decline in labor force participation. At 62.8%, this measure of people actually working or looking for employment has slumped back to the levels of the 1970s economic malaise. More importantly, the trend here has outstripped the U.S. Government’s forecasts, which only called for such a level around 2020. January 2013 may not see any improvement if Congress does not extend emergency unemployment benefits, with participation dropping further if the long-term unemployed chose to exit the workforce as a result. That would leave the Fed with an unwelcomed communications problem: quickly drop the 6.5% threshold unemployment rate from its monetary policy, or risk being seen as out of touch.”

Movers and shakers: Beam Inc.
US:BEAM
shares surged 24.6% on news that it will be acquired by Suntory Beverage Food Ltd. in a $16 billion deal, including debt. Shares of Alnylam Pharmaceuticals Inc.
ALNY, -3.12%
soared 40.9% on news Sanofi SA
SNY, -1.59%
will buy a 12% stake in the company to strengthen its new drug pipeline. The two firms will extend research collaboration to develop and sell new drugs aimed at treating rare genetic disorders. Shares of Twitter Inc.
TWTR, +0.38%
rose as high as 4% but eased by late trade and closed 1.4% after Goldman Sachs lifted its price target for the social media network to $65 from $46 and maintained a buy rating. Wendy’s Co.
WEN, -2.15%
shares rose 6.4%, as the fast-food company’s expected adjusted earnings per share were higher than analysts expected. Wendy’s also said its board had authorized a stock buyback program of $275 million. Shares of Lululemon Athletica Inc.
LULU, -1.25%
dropped 16.6% after the company cut its profit view.

In other markets:European and Asian stocks rose on Monday. Gold and oil prices were lower, while the dollar pushed higher.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.